Note Concerning Estimated Q3 2013 S&P500 Earnings Growth

The FactSet Earnings Insight report of September 6, 2013 had various notable commentary with regard to projected earnings growth and profitability trends for the S&P500.

Here is one excerpt from page 3, which discusses the reduction in the S&P500’s estimated earnings growth since June 30:

The estimated earnings growth rate for Q3 2013 of 3.6% is below the estimate of 6.5% at the start of the quarter (June 30). Eight of the ten sectors have recorded a decline in expected earnings growth during this time frame, led by the Materials sector. Other sectors that have witnessed decreases in predicted earnings growth since June 30 include the Information Technology, Consumer Discretionary, Consumer Staples, and Energy sectors.

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Overall Corporate Profits Relative To GDP

In the last post (“After-Tax Corporate Profits Chart 2nd Quarter 2013“) I displayed, for reference purposes, a long-term chart depicting Corporate Profits After Tax.

There are many ways to view this measure, both on an absolute as well as relative basis.

One relative measure is viewing Corporate Profits as a Percentage of GDP.  I feel that this metric is important for a variety of reasons.  As well, the measure is important to a variety of parties, including investors, businesses, and government policy makers.

As one can see from the  long-term chart below (updated through the second quarter), (After Tax) Corporate Profits as a Percentage of GDP is at levels that can be seen as historically (very) high.  While there are many reasons as to why this is so, from a going-forward standpoint I think it is important to recognize both that such a notable condition exists, as well as contemplate and/or plan for such factors and conditions that would come about if (and in my opinion “when”) a more historically “normal” ratio of Corporate Profits as a Percentage of GDP occurs.  This topic can be very complex in nature, and depends upon myriad factors.  In my opinion it deserves far greater recognition.

(click on chart to enlarge image)

CP-GDP 8-29-13 2Q-2nd Est

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed August 29, 2013

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

After-Tax Corporate Profits Chart 2nd Quarter 2013

Today’s GDP release (Q2, 2nd Estimate) was accompanied by the BLS Corporate Profits (preliminary estimate) report for the 2nd Quarter.

Of course, there are many ways to adjust and depict overall Corporate Profits.  For reference purposes, here is a chart from the St. Louis Federal Reserve (FRED) showing the Corporate Profits After Tax (last updated August 29,2013, with a value of $1830.4 Billion) :

CP_8-29-13 1830.4

Here is the Corporate Profits After Tax measure shown on a Percentage Change from a Year Ago perspective:

CP_8-29-13 1830.4 Percent Change From Year Ago

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Corporate Profits After Tax [CP]; U.S. Department of Commerce: Bureau of Economic Analysis; accessed August 29, 2013; https://research.stlouisfed.org/fred2/series/CP

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

The Sustainability Of Profit Margins

The topic of corporate earnings growth and its sustainability, given a variety of metrics, has been discussed in various posts in this blog.

The Wall Street Journal article of August 24-25, 2013, titled “Lofty Profit Margins Hint at Pain to Come for U.S. Shares,” discusses various facets of whether corporate profit margins are likely to be sustained.  As well, corporate profit margins and fluctuations are discussed from a long-term historical perspective.

While the article contains various noteworthy comments, here is one excerpt:

U.S. corporations, on average, currently report a profit of 9.3 cents for every dollar of sales, according to U.S. Commerce Department data—a profit margin of 9.3%. It has gotten only slightly higher than this over the past six decades: In the fourth quarter of 2011, it was 10%. The average since 1952 is 5.9%.

Profit margins in the past have exhibited a strong historical tendency to “revert to the mean,” according to James Montier, a visiting fellow at the U.K.’s University of Durham and a member of the asset-allocation team at Boston-based GMO, an investment firm with $108 billion under management. That is, above-average levels in the past have tended to quickly fall, just as below-average levels in the past have soon risen.

Consider all occasions since the early 1950s in which the profit margin rose to at least 6.9% or fell to at least 4.9%—one percentage point away from its historical mean, in other words. On average, it was back at its mean in just 4.8 years.

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Impact Of Low Interest Rates On Corporate Profitability

In the last post (“Headwinds Facing Future Corporate Profitability“) one of the factors I discussed was the impact that rising interest rates have had on corporate profitability.

As I indicated in that post, I believe there are various impacts, both “direct” and “indirect,” that low interest rates have had on corporate earnings.  Two recent article discuss what (I consider “direct”) impact low interest rates have had on overall corporate profitability, as depicted by S&P500 earnings.

The first is seen in the Wall Street Journal of July 23 and is titled “Fed Plays Part at the (Profit) Margins.”  This artice discusses the impact of low interest rates on S&P500 margins.  Two excerpts from the article:

But an analysis conducted by independent strategist Brett Gallagher shows that low interest rates have done much to bolster margins. Given the superlow interest-rate era may soon start drawing to a close, that could be another reason for investors to question just how long margins can hold up.

also:

The lower rates have helped companies substantially lower their interest-rate costs. Mr. Gallagher found that in 2012, interest expenses—what companies had to pay to service their debt—came to 1.8% of sales for companies in the S&P 500. That compares with a 15-year average of 3.9%. Nor does this reduction in interest expense reflect a reduction in debt: Net debt as a percentage of assets stood at 14.2%, above the 15-year average of 11.5%.

Another article that discusses the impact that interest rates have had on corporate earnings is a Reuters article seen in the Chicago Tribune article of July 25 titled “Analysis:  How much is Fed aid to U.S. corporate profits worth?” An excerpt from this article:

The Fed’s effect on corporate earnings is difficult to quantify. Van Batenburg estimates that corporate savings on interest expense after rates fell to historic lows has accounted for about 47 percent of S&P 500 earnings growth since 2009.

At the end of 2009, quarterly earnings per share for the S&P 500 were less than $20, and companies in the index paid about $4 a share in interest, van Batenburg said. Now the S&P 500 is generating about $26.70 a share in quarterly earnings but pays just $1.50 a share in interest.

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with all (or any) of the views expressed by these outside parties.

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StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.